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Letter to the Editor

The State of the Industry

Where are we now and what lies ahead in 2003?

INSIGHT’s January tradition of preparing a state of the industry report continues this month as we begin our thirteenth year of news and information providing for the Collision Repair Industry. Let’s see where we are now and what we see in the INSIGHT crystal ball for 2003.

Industry Statistics

We begin with some industry statistics:

Flat Market

The total U.S. collision repair market, after hitting the $27.5 billion mark in 2001, up about six percent from the preceding year, dropped to $26 billion in 2002, based on a reduced number of accidents resulting in repaired vehicles. It looks as though we can expect more of the same in 2003.

Shop Numbers on the Decline

The decline in the number of shops leveled off in 2002, holding steady at just below 53,000. (Of those, fewer than 11,000 have annual sales of $600,000 or more, only 20,000 are computerized, and about 87 percent of larger shops participate in one or more insurer DRP.)

INSIGHT predicts that shop numbers will decline during 2003, with the lower mid-size facilities ($300,000 - $450,000 per year) shops hit the hardest. The general slowdown in the U.S. economy and the overall decrease in repairable vehicles available for repair has been hurting the bottom line at mid-size facilities throughout 2002.

One ray of hope for repairers and industry suppliers has been longer-term trends showing the number of vehicles in operation in the U.S. growing to nearly 215 million (up from 140 million in 1980). However, the annual percentage of those vehicles involved in an accident will probably hold at last year’s 17 percent (up from 15 percent in 1995 though still down from 20 percent in 1980 and 18 percent in 1990).

Accidents resulting in a repaired vehicle or vehicles remains at just over ten percent, with the difference between 17 and 10 percent being a combination of totals and unrepaired vehicles.

Total Loss Numbers Increase

The total number of vehicles repaired will not be likely to rise from last year’s 18-19 million mark (up from a low of 12-14 million in 1995), unless Mother Nature decides to dump a worse-than-predicted winter on the nation.

Most significant in the whole equation is the rising number of totaled vehicles. By the end of 2003, nearly 15 percent of automobiles in accidents will be deemed beyond reasonable repair cost markers by insurers. Adjustors were holding fast to the line of 65 percent of Actual Cash Value (ACV) to determine the fate of vehicles during 2002, and will continue to do so this year.

Since 1990, the percentage of totaled vehicles has more than doubled, and multiple airbags in vehicles, increasingly complex electronic components, and glass and dashboard damage have been the major reasons for this. When deployed in accidents, the total cost of airbags and other expensive parts can add a hefty dollar amount to replacement parts’ estimates.

Less Customer-Paid Work

Also having an impact on repair volume is a decrease in customer-paid collision repair. The percentage of damaged vehicles not being repaired at the owners’ choice is rising, from 20 percent in 1980, to 24 percent in 1990 to about 28 percent currently. Consumers will continue to be cautious about major expenses even though the U.S. economy seems to be slowly improving.

DRPs Continue to Grow

As recently as 1996, claims handled through DRPs amounted to only about eight percent of all insurance-paid repair work. Within two years, that figure had more than doubled to 20 percent and is expected to be over 35 percent for 2003. Expect contract arrangements between insurers and shop networks. (Consolidator locations and Value Added Program member shops may well be attractive negotiators.)

Insurer Paid Claims Down

Rising severity and decreasing investment income will continue to combine to force insurers to look for new ways to cut costs - particularly loss adjusting costs.

The latest available statistics from the National Associa-tion of Independent Insurers (NAII) are showing an almost six percent drop in insurer collision repair paid claims in 2002. This will hold steady throughout 2003.

Allstate/Sterling Still Big News

Allstate's acquisition of Sterling Collision Centers in 2001 was a big story in 2002 and will continue to be a hot topic in the industry for at least a few years. It looks as though body shops in Texas will be actively supporting Texas State Senator John Carona’s bill to prevent insurers from owning repair facilities.

Carona, in a press conference at NACE, said that the situation is an issue of consumer trust and confidence that may be likened to the early days of HMOs. He believes that instituting managed care in collision repair would poorly serve the consumer and be detrimental to a healthy business environment.

As yet far from proven, however, is the senator’s opinion that, given the insurer’s purpose in buying a body shop is to repair vehicles at cheaper prices, that insurer-owned shops will produce repairs of lesser quality. Expect intense study of Sterling’s repairs during this year to determine if the repairs are, well, sterling in quality.

Computer Strides Forward

The industry's victory in 2001 against "encryption" and CIECA’s groundwork industry exchange of information standards efforts will continue in 2003 to reap benefits for repair facilities.

The open systems solution is finally coming into its own in the industry. ADP, Mitchell, and CCC, as well as Summit Software Solutions, Comp-Est, See Progress, a new ARMS, and many other companies, are offering a dizzying array of software for repair facilities.

The really good news is that much of the new software is offered in component pieces, allowing shops to pick and choose, Chinese restaurant menu style, providing custom fits of software to shop operations.

Pricing for several software offerings seen at NACE varied, depending on components selected. This will put computerized estimating and management systems within reach for many smaller to mid-size shops.

Use of the Internet and electronic commerce are very much a part of the scene. Parts ordering and data exchange services via the Internet are improving.

The new tablet portable computers are the big news for 2003, though. Lightweight, reasonably priced, and of particular appeal to shop personnel - designed for use on a wireless network - this is a hardware dream come true for our industry. This year will certainly see a tablet trend in shops, particularly in multiple location businesses.

After several years in which the early potential of computer usage promised reductions in clerical personnel but in actuality forced many computerized facilities to add office staff, 2003 may just be a real turn-around year. The shop computer system may be growing into the efficient tool it was meant to be!

Diminished Value and Increased Litigation

There are many difficult-to-answer questions surrounding diminished value. Insurers’ attorneys will argue that returning a vehicle to pre-accident condition is the insurance companies’ contractual agreement. The concept of diminished value comes into play only at a future point of resale of the vehicle, where the question becomes: Does the fact that a vehicle was involved in an accident automatically make its sale price less than a vehicle that was never in an accident, regardless of the quality of repair?

This question is certainly going to be asked in courts this year. Shop owners should be precise and specific on all written estimates. Avoid the tendency to leave items off estimates for which insurers may not pay. List performed procedures with "no charge" notations if necessary. Prepare now to avoid costly court cases. Attorneys will probably be arguing about diminished value in 2003.

OEM Activity

OEMs - first GM and Toyota in 2001, most recently Ford - have launched efforts to encourage their dealers to open collision repair facilities - or improve the performance of their existing body shops.

The OEM agreement in late 2002 to share service and technical information with independents was, despite some criticism that it was not enough, a good first step toward improved information sharing. This year many independents will be watching carefully to see if car manufacturers will be forthcoming with the technical material as pledged.

Consolidators Focus on Efficient Operations

The race among consolidators in 2003 is not about numbers of shops - it’s about shop numbers, the bottom line. The drive is on to reduce overhead, improve standardization (integration), and perhaps most importantly, show significant gains in production.

Look for industrialization, or at least improvements in operational efficiency - whether it be through large factory-like operations in a market or a hub-and-spoke approach - to continue, particularly by consolidators, with higher parts-to-labor ratios, and "assembly line" type production models with lower-tech but more highly specialized labor.

Centralized Call Centers

Since 2001 many insurers have established centralized call centers to take first notice of loss calls and refer vehicle owners to shops. Expect to see shop call centers in 2003, for multi-shop businesses and probably for several groups of independents joining together to co-op calls.

A game plan for 2003

Efficiency, both in the office and in the shop operation is THE word for 2003. In the front office, shop owners will want to continue efforts to improve the customer experience (and to document resulting CSI); prepare for increased use of electronic commerce; and develop or improve insurer relationships on a local if not regional or national basis.

On the production floor, improving cycle time with systems that don't result in overlooked details will become more and more critical. The trend toward industrialization is likely to expand. Every shop owner must make a quality operation the top priority.

Shop owners are well advised to keep one careful eye on the bottom line, and the other eye alert to business performance. In any year, this is your full-time job.   o

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